Bloomberg News

Canada Dollar Trades Within Cent of Parity Before Bank Meeting

September 06, 2011

Sept. 6 (Bloomberg) -- The Canadian dollar traded within one cent of parity with the greenback before tomorrow’s Bank of Canada meeting as stocks fell and government bond yields slid to record lows on concern Europe’s debt crisis is worsening.

The currency, called the loonie, erased losses after an index of service industries in the U.S., Canada’s biggest trade partner, unexpectedly rose. The loonie fell in August on concern a slowing global economy will crimp Canada’s exports. Futures indicate odds are about even Bank of Canada Governor Mark Carney will cut borrowing costs by year-end after data showed last week the nation’s economy unexpectedly shrank in the second quarter.

“The market is taking a cautionary tone until we get data from the Bank of Canada tomorrow,” Steve Butler, managing director of foreign-exchange trading at Bank of Nova Scotia’s Scotia Capital, said by phone from Toronto. “The Canadian dollar has hung in quite well, but at some point this week I think we will probably drift back toward parity given that the market right now doesn’t want to know about risk.”

The Canadian currency was little changed at 99.05 cents per U.S. dollar at 5 p.m. in Toronto, compared with 99.07 cents yesterday. Earlier it weakened as much as 0.6 percent to touch 99.66 cents, the weakest level since Aug. 11. One Canadian dollar buys $1.0098. The currency last traded on a one-for-one basis with the greenback Aug. 9.

The loonie rose against the euro and New Zealand’s dollar.

“We see a fair amount of corporate interest to buy Canada at these levels,” said Butler.

Bond Yields Drop

The yield on 10-year Canadian government notes fell as much as eight basis points, or 0.08 percentage point, to 2.22 percent, the lowest level in Bloomberg data beginning in 1989, before trading at 2.24 percent. The price of the 3.25 percent securities maturing in June 2021 rose 59 cents to C$108.83. Yields on 30-year bonds touched 2.89 percent, the lowest since at least 1990.

Yields on U.S. and German 10-year notes also dropped to record lows as concern the euro area’s debt crisis will cripple financial institutions underpinned demand for the safest assets.

The loonie fell against Norway’s krone, which rose against all of its 16 most-traded peers as investors sought a European alternative to the euro or franc. The Swiss currency, which gained 19 percent against the greenback this year through yesterday as risk appetite ebbed, tumbled after the nation’s central bank imposed an exchange-rate ceiling.

‘Negative Sentiment’

“There’s a lot of negative sentiment coming out of the euro zone, and people are looking for safety,” Rahim Madhavji, president of Knightsbridge Foreign Exchange Inc., said in a telephone interview from Toronto. “The risk-off trade is back.”

The Canadian currency weakened 0.6 percent to 5.4615 krone. It gained 0.7 percent to C$1.3866 per euro, strengthened 1.2 percent to 81.49 cents per New Zealand dollar and climbed 9.6 percent to C$1.1486 to the franc.

The Institute for Supply Management’s index of U.S. non- manufacturing businesses increased to 53.3 in August from 52.7 a month earlier. A reading above 50 signals expansion. The median estimate in a Bloomberg News survey was for a decline to 51.

“Investors are trying to assess the extent of the decline in the U.S. economy and see whether it’s going to be able to muddle through,” Knightsbridge’s Madhavji said.

Stocks fell, with the Standard & Poor’s 500 Index dropping as much as 2.9 percent before trading down 0.7 percent. Canada’s benchmark S&P/TSX Composite Index also declined 0.7 percent.

Futures on crude oil, Canada’s biggest export, dropped as much as 3.8 percent to $83.20 a barrel in New York before trading little changed at $86.46. Spot gold fell 0.1 percent to $1,873.80 an ounce. Raw materials including oil and gold account for about half of Canada’s export revenue.

Bank of Canada

The loonie has weakened 3.6 percent this year, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The greenback has dropped 4.4 percent, while the yen has gained 0.3 percent.

All 27 economists in a Bloomberg News survey expect the Bank of Canada to keep its policy rate at 1 percent tomorrow.

“The market has already guided expectations toward 50-50 on a rate cut by December,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada, by phone from Toronto. “It will all be about the guidance, but with a negative GDP and a deteriorating global backdrop, one would expect Carney to take a dovish tone.”

The benchmark overnight rate has been 1 percent since September 2010. It was increased in three steps last year from a record low 0.25 percent.

--Editors: Greg Storey, Paul Cox

To contact the reporters on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net; Chris Fournier in Halifax, Nova Scotia, at cfournier3@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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